Co-published project finance guide: Indonesia


An economic masterplan


Ibrahim Assegaf and Yanu Wiriasmoko of AHP describe how PPP deals are beginning to take off in Indonesia, thanks to a series of government initiatives


seven percent a year that has proved immune to global economic turbulence, and surging inward foreign direct investment, Indonesia would at first sight appear to be a dream destination for project financiers looking to seal public-private partnership (PPP) deals. Unfortunately, this was not the case until


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recently, despite the fact that the alleviation of infrastructure bottlenecks was one of the key campaign promises of President Susilo Bambang Yudhoyono. With the government lacking funds to tackle the infrastructure gap, several conferences have been convened over the last few years to drum up interest among investors (with the latest taking place in August 2012). However, progress has been slow until recently for a number of reasons, chief of which was fears over security of return on investment, with both banks (particularly foreign banks) and project sponsors insisting on government guarantees that were frequently not forthcoming: the Ministry of Finance has been a strong advocate of fiscal prudence and rectitude ever since the Asian economic crisis of 1997/98. The second major problem was land


acquisition. This was the result of a number of interrelated factors, including the absence of a concept of eminent domain, an inadequate compulsory land acquisition mechanism, chaotic land title administration, speculation and insider dealing leading to land-price inflation, and a local culture of opposition to land procurement by the state dating back to forced land seizures under Indonesia’s authoritarian former president, Suharto, who ruled for 31 years from 1967 until 1998. As a consequence, PPPs have been slow to


develop in Indonesia. Now, however, the key problems have been addressed by the Government through a number of innovative laws and regulations that would appear to position the country on the cusp of a new dawn for project finance based on the PPP concept.


78 IFLR/December/January 2013


ith a yawning infrastructure deficit, a population of almost 250 million, an economy growing by nearly


The masterplan: MP3EI The 2011-2025 Indonesian Economic Development Masterplan, formally adopted in May 2011 and better known by its Indonesian abbreviation, MP3EI, is being touted by the government as a game changer in the infrastructure sector as the state has pledged to play a robust role both as regulator and facilitator. Given that it has often been said that Indonesia’s economy grows despite and not because of government, this represents something of a new development. The Masterplan, which aims for annual


growth of seven to eight percent over its term (up from around 6.5% in 2012), sees Indonesia becoming one of the world’s top 10 economies by 2025, with a GDP of $4.5 trillion and a per capital income of $15,000, compared with around $3,000 at present. The plan consists of three elements: (a) the


creation of six integrated economic corridors connecting economic growth centres on five islands: Java, Sumatra, Kalimantan (Indonesian Borneo), Sulawesi and the Indonesian half of Papua island; (b) strengthening national connectivity through better communications; and (c) promoting scientific and technological development. Total spending on the plan is estimated at


$468.5 billion over the next 14 years, with 774 infrastructure projects to be developed at a cost of $240 billion at current prices. As the government has recognised it does not have the resources to fund the infrastructure component of the plan itself, it is hoping that the private sector will finance at least half of the projects, primarily through PPPs. A special committee (the KP3EI) has been


established to monitor and report on the progress of the Masterplan. According to the KP3EI, since the launch of the plan in 2011, the government has broken ground on 99 projects worth Rp356 trillion ($37 million), or 87% of 114 targeted projects budgeted at Rp420 trillion. However breaking ground is defined very broadly, with just about any project-related activity (such as discussions with potential investors) considered enough to satisfy the definition. Given that various


state institutions use different parameters, it is difficult to accurately quantify progress.


PPP framework The role of the private sector in infrastructure development in Indonesia dates back to the early 1990s, before the Asian financial crisis. By 1997, over $20 billion had been invested in the sector, with power accounting for $10.2 billion, telecommunications $8.4 billion and transportation $2.1 billion. Following the Asian financial crisis in the late 1990s and a number of bitter disputes with foreign investors, particularly in the power sector, private infrastructure investment came to a virtual halt. As a result, the Indonesian government was forced to redesign its PPP framework so as to attract additional investment and compete on a stronger footing with other countries. The current PPP framework is built around


Presidential Regulation 67/2005, as subsequently amended in 2010 and 2011. This provides an accountable foundation for the implementation of PPP schemes. The selection of PPP concessionaires or licensees must be done on a competitive basis and unsolicited offers are discouraged. In addition, proper due diligence must be conducted by the relevant government authorities prior to a project being put out to tender. New laws have also been enacted to


encourage PPP schemes in a number of sectors that were previously the domain of state monopolies, such as the Railways Act (2007), the Shipping Act (2008), the Electricity Supply Act (2009) and the Aviation Act (2009) Furthermore, project development is now


supported by the new Land Acquisition Act (2012), and its ancillary regulations, which significantly streamline the land acquisition process for public infrastructure projects, with the maximum period required to complete the acquisition process now being set at 583 days. Yet there is one major difficulty – the Act


only applies to acquisition processes commenced since its coming into effect, while processes underway prior to that will continue to be governed by the old ineffective mechanism. On the financing side, the government has


established a number of special schemes and institutions to provide financial support to PPP projects. These include the setting up of a land fund (Minister of Public Works Regulation 12/PRT/M/2008), under which the government will cover any losses resulting from increases in land acquisition costs of more than 110% over the price agreed in the concession agreement, or two percent of the total investment cost, whichever is the higher. The land fund was followed in 2009 by the Ministry of Finance’s creation of Sarana Multi


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